2023 (4) TMI 1412 - AT - Income Tax

Tax Deduction Denied: Timely Provident Fund and ESI Contributions Crucial for Claiming Expense Under Section 36(1)(va)

Prime Comfort Products Pvt. Ltd. Versus ACIT, Circle 19 (1), New Delhi.

The HC upheld disallowance of tax deduction for delayed payment of employees' PF and ESI contributions under Section 36(1)(va). The court rejected the ... Disallowance of deduction claimed being delayed payment of Employees Contribution to Provident Fund (PF) and Employees State Insurance (ESI) - HELD THAT:- We unable to accept such contention of the assessee in view of the binding ratio laid down in case of Checkmate Services P. Ltd. [2022 (10) TMI 617 - SUPREME COURT] wherein, it has been held that unless employees contribution to PF and ESI are deposited within the due date prescribed under the relevant statute governing such payments, the amount in question has to be treated as income of the assessee in terms of section 36(1)(va) read with section 2(24)(x) of the Act. Therefore, the disallowance has to be upheld. In so far as the contention of learned counsel for the assessee that such adjustment is not contemplated under Section 143(1)(a) (iv), we are unable to accept the contention in view of the decision of Savleen Kour [2023 (2) TMI 51 - ITAT DELHI] Contention of the assessee that the deduction is otherwise allowable under Section 37(1) - No merit in such submission. In case of BBG Metal Syndicate Pvt. Ltd. [2022 (11) TMI 1428 - ITAT CUTTACK] while considering such submission has not expressed any opinion and has simply restored the issue to the file of the Assessing Officer. Therefore, the decision cited cannot be regarded to be a precedent for laying down the ratio that the payment made can be allowed as deduction under Section 37(1) of the Act. In so far as, learned counsel’s contention that the due date should be calculated with reference to the due date for payment of salary, direct the AO to factually verify the date of payment of employees contribution to PF and ESI and in case they are found to have been paid within the due date prescribed under the PF and ESI Act or within the grace period, if any, under these Acts, then, deduction can be allowed Appeal is allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDERED Whether deduction claimed for delayed payment of employees' contribution to Provident Fund (PF) and Employees State Insurance (ESI) is allowable under the Income Tax Act. Whether such disallowance can be made by way of adjustment under Section 143(1)(a)(iv) of the Income Tax Act. Whether deduction for employees' contribution to PF and ESI can be allowed under Section 37(1) of the Income Tax Act. Determination of the relevant due date for payment of employees' contribution to PF and ESI for allowing deduction. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Allowability of deduction for delayed payment of employees' contribution to PF and ESI Relevant legal framework and precedents: Section 36(1)(va) read with Section 2(24)(x) of the Income Tax Act provides that any sum payable by the employer as employees' contribution to PF and ESI, if not deposited within the prescribed time, shall be treated as income of the employer and thus not allowable as deduction. The Supreme Court's ruling in a binding precedent confirms this interpretation. Court's interpretation and reasoning: The Tribunal relied on the Supreme Court's decision which held that unless the employees' contribution to PF and ESI is deposited within the due date prescribed under the relevant statute, the amount must be treated as income under Section 36(1)(va) read with Section 2(24)(x). The Tribunal rejected the contention that deduction is allowable if payment is made before the due date of filing the return of income. Key evidence and findings: The assessee had claimed deduction for employees' contribution to PF and ESI which was not deposited within the prescribed statutory due date. The Centralized Processing Centre (CPC) disallowed the deduction accordingly, and the first appellate authority upheld the disallowance. Application of law to facts: Since the payment was delayed beyond the prescribed statutory due date, the deduction was rightly disallowed under Section 36(1)(va) and Section 2(24)(x). Treatment of competing arguments: The assessee's argument that deduction should be allowed if payment was made before filing the return was rejected based on binding Supreme Court precedent. Conclusion: Deduction for delayed payment of employees' contribution to PF and ESI is not allowable if payment is not made within the prescribed statutory due date. Issue 2: Validity of disallowance by adjustment under Section 143(1)(a)(iv) Relevant legal framework and precedents: Section 143(1)(a)(iv) allows the Assessing Officer to make adjustments to income based on information available, including disallowance of inadmissible deductions. Court's interpretation and reasoning: The Tribunal rejected the assessee's contention that disallowance of deduction for delayed payment of PF/ESI contribution cannot be made by adjustment under Section 143(1)(a)(iv). It relied on a coordinate bench decision which upheld such adjustment as valid. Key evidence and findings: The adjustment was made at the processing stage by the CPC and sustained by the first appellate authority. Application of law to facts: The disallowance made by adjustment under Section 143(1)(a)(iv) was held to be valid and in accordance with law. Treatment of competing arguments: The assessee's objection to the mode of disallowance was overruled based on precedent. Conclusion: Disallowance of deduction for delayed payment of employees' contribution to PF and ESI can be validly made by adjustment under Section 143(1)(a)(iv). Issue 3: Allowability of deduction under Section 37(1) of the Income Tax Act Relevant legal framework and precedents: Section 37(1) allows deduction of any expenditure not specifically disallowed elsewhere, if it is incurred wholly and exclusively for business purposes. Court's interpretation and reasoning: The Tribunal found no merit in the assessee's reliance on Section 37(1) for allowing deduction of delayed payment of employees' contribution to PF and ESI. The cited coordinate bench decision merely restored the issue to the Assessing Officer without expressing any opinion on allowability under Section 37(1). Key evidence and findings: No binding precedent was found to support allowability of such deduction under Section 37(1). Application of law to facts: Since Section 36(1)(va) specifically governs the treatment of delayed PF/ESI payments, Section 37(1) cannot be invoked to override the statutory disallowance. Treatment of competing arguments: The Tribunal declined to accept the argument that Section 37(1) could be used to claim deduction for delayed payments. Conclusion: Deduction for delayed payment of employees' contribution to PF and ESI is not allowable under Section 37(1) of the Income Tax Act. Issue 4: Determination of the relevant due date for payment of employees' contribution to PF and ESI Relevant legal framework and precedents: The PF and ESI Acts prescribe specific due dates for payment of employees' contribution. The due date is not linked to the salary payment date or the date of filing the income tax return. Court's interpretation and reasoning: The Tribunal directed the Assessing Officer to verify the factual dates of payment of employees' contribution to PF and ESI. If such payments were made within the due date prescribed under the PF and ESI Acts or within any grace period allowed, deduction should be allowed. Key evidence and findings: The assessee contended that the due date should be reckoned with reference to salary payment date; however, the Tribunal emphasized adherence to statutory due dates under the PF and ESI Acts. Application of law to facts: The Tribunal left open the possibility of allowing deduction if payment was made within the prescribed statutory due dates or grace period, subject to factual verification. Treatment of competing arguments: The Tribunal rejected the assessee's broader interpretation of due date but allowed factual verification for compliance with statutory timelines. Conclusion: The relevant due date for payment of employees' contribution to PF and ESI is the date prescribed under the respective statutes, and deduction can be allowed only if payment is made within that period or any applicable grace period.